FUTURE CHALLENGES AND

MEGATRENDS IN THE

FINANCIAL SERVICES SECTOR

Josina Kamerling,

Head of Regulatory Outreach, EMEA

CFA Institute

Ohrid, 4 May 2018

© 2018 CFA Institute. All rights reserved.

2

MISSION & FACTS

Leads the investment profession globally by promoting the highest standards of ethics, education,

and professional excellence for the ultimate benefit of society

+ Educated,

ethical investment

professionals

= Financial markets

that reflect

CFA Institute beliefs

Global financial

markets that serve

the public interest

CFA INSTITUTE KEY FACTS

• Not-for-Profit status;

• More than 155,000 Members;

• 151 Societies across the world;

• EU Societies: Austria, Belgium, Bulgaria, Cyprus,

Czech Republic, Denmark, Finland, France, Germany,

Greece, Hungary, Ireland, Italy, Luxembourg,

Netherlands, Poland, Portugal, Romania, Slovenia,

Spain, Sweden, United Kingdom.

• Other European societies: Liechtenstein, Norway,

Russia, Switzerland, Turkey, Ukraine.

4

CFA INSTITUTE STRATEGIC FUNCTIONS

5

Develop Future Professionals

CREDENTIALING

• Develop market-leading credentialing

programs based on relevant investment

management competencies

Develop future investment

management industry professionals

Deliver Member Value

MEMBER VALUE

• Education: Provide opportunities for

continuing professional development

• Recognition: Raise awareness

and value of the CFA designation

• Affiliation: Enable affiliation

and engagement

• Conduct: Promote and enforce

professional conduct

Support members in their

professional practice

Build Market Integrity

STANDARDS & ADVOCACY

• Promote and publicly disseminate

thought-provoking advocacy and content

that sometimes may be controversial

• Create professional standards

and practitioner tools

• Deliver actionable, innovative outputs

• Partner to affect regulations that improve

investor protection, ethical practices,

market fairness, and investor outcomes

Shape an investment management

industry that works in the best

interest of investors SUB-MISSIONS

MISSIONS

TACTICS

6

THE FUTURE OF THE INVESTMENT INDUSTRY

MOST UNDERESTIMATED RISK TO

GLOBAL MARKETS (CFA INSTITUTE

GLOBAL MARKET SENTIMENT SURVEY

2015 )

6

FUTURE GAME CHANGERS

CFA Institute study (April 2017)

• Ageing demographics: economic growth is likely to slow globally due to slowing

population growth. For financial services, the consequences range from underfunded

pensions to a lower capital stock to slowing consumption, and, therefore, more slowing of

economic growth.

• Technological Megatrends:

- financial analysis and investment banking with far few people;

- reducing the systemic risk of traditional banks, but increasing the need for effective

underwriting before loans are issued;

- Investment in technology increases and becomes more specialized;

- New levels of specialization of financial products emerge;

- Omnipresent risk management and enforcement with real-time financial analysis of the

entirety of a business’ financial performance;

- Peer-to-peer trading of securities, like an eBay for financial securities;

- Increasing allocations to energy technology in the impact investing category;

- Creation of transnational currencies (like bitcoin).

8

FUTURE GAME CHANGERS

CFA Institute study (April 2017)

• Economic Imbalances: effects of deleveraging after the peak of the debt

supercycle; Low sustained interest rates; growth outlook affected by aging

demographics; income inequality (tensions in politics and businesses).

• Government footprint: increased levels of activity in regulations and actions by

politicians that impact the investment industry; predominance of national

jurisdictions in finance creates attractions for regulatory arbitrage; geopolitical

rifts in the EU and elsewhere have weakened global governance.

• Resource management: issues of resource management are growing in

importance, and thus have direct and indirect effects on the investment

industry; the impact of climate change has already been noticed by markets;

conflicts over food, water, and other sources of natural capital. Mitigating

factors include improvements in renewable energies, energy efficiency,

desalination of water, and others.

9

10

TRUST IN CRISIS

TRUST BAROMETERS INSIGHTS • Globally, trust in the four institutions of government, business, media and NGOs

declined by 3% relative to trust levels in 2016;

• 15-point gap between the trust held by informed public and that held by mass population (3% increase relative to last year);

- 53% of the surveyed respondents believe that the system is not working for them. The main reasons are: unfairness of the system;

-No hope for the future;

- Leaders will not fix problems.

• The principal societal concerns and fears are commonly associated with populist actions. They are globalisation (62% concerned; 27% fearful); eroding social values (56% concerned; 25% fearful); immigration (55% concerned; 28% fearful); and the pace of innovation (51% concerned; 22% fearful)

• 53% agree that the pace of change in business and industry is too fast. The main concern is losing jobs due to lack of training or skills (60%); foreign competitors (60%); immigrants who work for less (58%); jobs moving to cheaper markets (55%); and automation (54%).

11

Source: 2017 Eldelman Trust Barometer

CFA INSTITUTE

NEXT GENERATION OF TRUST (2018)

• 44% of retail investors who responded to our survey trust financial services, while 35% are

neutral, and 21% are distrusting of the industry. Technology is much more trusted (64%)

while there is little trust in governments (30%);

• Younger investors are more trusting of financial services more than older investors are;

• Underperformance (57%) and lack of communication or responsiveness (51%) are the

reasons they leave a relationship with an adviser;

• For institutional investors, the two most important attributes when hiring an asset manager

are trust to act in the client’s best interest and ability to achieve high returns;

• Strong link between the use of technology by financial advisers and increases in trust

(particularly for younger investors). However, technology is not yet trusted to give advice,

and, investors are nervous about the vulnerability of their data in case of security breaches.

12

Source: CFA Institute, “The next Generation of trust”, 2018

13

Source: CFA Institute, “The next generation of trust”, 2018

14

Source: CFA Institute, “The next generation of trust”, 2018

15

Source: CFA Institute, “The next generation of trust”, 2018

16

Source: CFA Institute, “The next generation of trust”, 2018

17

EU CAPITAL MARKETS

18

75 PERCENT OF TRADING IN EURO-DENOMINATED INTEREST-

RATE SWAPS TAKES PLACE IN LONDON

19

THE MAIN TRADING PARTNER FOR EACH EU MEMBER STATE

20

Source: Simon Kuestenmacher, 2018

EUROPEAN SUPERVISORY MARKETS

AUTHORITY New areas proposed for direct supervision

21

Area Legislation European Securities

Markets Authority’s direct

supervisory powers for

EU entities

The European Securities

Markets Authority’s powers

for third country entities

Capital market entry Prospectuses Approval of certain

categories of prospectuses

by EU issuers

Approval of all

prospectuses drawn up

under EU rules by third

country issuers

Capital market actors Harmonized collective

investment funds

(EuVECA, EuSEF and

ELTIF)

Authorisation and

supervision of funds which

are regulated at the EU

level

N/a

Capital market

infrastructure

Central Counterparties Supervisory powers in

relation to CCPs

(Commission proposal of

June)

Recognition and

supervisory powers for third

country CCPs (already

existing; reinforced in

Commission proposal of

June)

Capital market data &

information

Credit Rating Agencies

(CRAs)

Registration and

supervision of CRAs

(already existing)

Endorsement of third

country CRAs (already

existing)

Trade Repositories (TRs) Registration and

supervision of trade

repositories (already

existing)

Recognition of third country

TRs (already existing)

Data reporting services

providers

Registration and supervision of

data reporting service providers N/a

Benchmarks Supervision of critical

benchmarks

Endorsement and

supervision of third country

benchmarks

Source: European Commission

22

SUSTAINABLE FINANCE

SUSTAINABLE FINANCE ACTION PLAN (MARCH 2018)

The European Commission has recently launched an Action Plan on Sustainable Finance with the

objective of:

• Re-orienting capital flows towards sustainable investment, in order to achieve sustainable and

inclusive growth;

• Managing financial risks stemming from climate change, natural disasters, environmental degradation

and social issues; and

• Fostering transparency and long-termism in financial and economic activity.

• The actions proposed by the Commission include:

- Creating EU labels for green financial products on the basis of an EU classification system

(taxonomy). This will allow investors to easily identify investments that comply with green or low-

carbon criteria;

- Requiring insurance and investment firms to advise clients on the basis of their preferences on

sustainability;

- Incorporating sustainability in prudential requirements;

- Enhancing transparency in corporate reporting: revision of the guidelines on non-financial

information;

In May 2018 the Commission will put forward a proposal on the duties of institutional investors and

asset managers regarding sustainability in the investment process.

23

EUROPEAN PARLIAMENT REPORT ON SUSTAINABLE FINANCE

• Fiduciary duty rules are already embedded in the EU regulatory

framework but the European Parliament calls for more clarification in

the course of defining, establishing and testing a robust and credible

sustainable taxonomy;

• Fiduciary duty should also encompass a mandatory “two-way”

integration process whereby all actors across the investment chain

must integrate financially material ESG factors into their decisions;

• The European Parliament calls for the incorporation of the cost of non-

action on climate, environmental and other sustainability risks in the

risk management and due diligence assessment of company boards

and public authorities.

24

CFA INSTITUTE ESG SURVEY (2017)

• 73% of our members take ESG issues into account in their investment analysis and decisions (particularly, ESG issues);

• Demand from clients and/or investors and a proven link between ESG matters and financial performance are the two factors causing our members to take into consideration ESG issues;

• 65% of respondents consider ESG issues to help manage investment risks, and 45% because clients/investors demand it.

• The three factors that most limit our member organisations’ ability to use non-financial information in investment decisions are:

- Lack of appropriate quantitative ESG information;

- Lack of comparability across firms; and

- Questionable data quality/ lack of assurance.

25

Source: CFA Institute, “2017 ESG Survey: Global Perceptions of Environmental, Social, and Governance Issues in Investing

26

CONCLUSIONS

CURRENT ISSUES

• Not enough harmonisation and consistency in supervision and

enforcement practices among Member States. This is needed for well-

functioning and integrated capital markets in the EU;

• Still existing differences in the implementation and enforcement of EU

laws and practices (the EU supervisory agency steps in only in

exceptional circumstances, i.e. when the national authority fails to

enforce EU law and in the case of an emergency established by the

Council);

• Few tasks are shared between the national and EU levels (for instance,

non-binding recommendations relative to different enforcement

aspects). More legally-binding and exclusive powers at EU level

institutions and agencies are needed.

27

www.cfainstitute.org

Follow @CFAinstitute on Twitter

28

© 2018 CFA Institute. All rights reserved.